Discuss the roles of barriers to entry and barriers to exit in sustaining monopolistic behaviour. Can barriers to entry be sustained in the long run?

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Discuss the roles of barriers to entry and barriers to exit in sustaining monopolistic behaviour. Can barriers to entry be sustained in the long run?

A monopoly exists if there is only one supplier for an industry’s product. This supplier does then hold market power and sets prices and the level of its output in order to reach maximised profit. This profit reaches a supernormal level in both the short and long run. To protect and sustain this profit a monopolist takes advantage of barriers of entry and exit, which are designed to block potential entrants from entering the market profitably.

An entry barrier is anything that requires an expenditure by a new entrant into an industry but that imposes no equivalent cost upon an incumbent and has therefore the effect of making the market less contestable. Barriers to entry can be divided into two types: innocent and strategic entry barriers.

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Innocent barriers are naturally made and can arise from scale economies or absolute cost advantages of incumbent firms. That means that an entrant into the market would face a higher average cost curve than the incumbent being longer in the market and having more experience what allows him to cut costs. The entrant is therefore not able to produce as efficiently and cheaply. This then works as disincentive to enter the market. Other examples of such barriers are cultural differences (e.g. Kosher food or Halal butchers) or geographic isolation (bus service in rural areas).

Strategic or behavioural barriers arise from ...

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